Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 44% per year-during Years 4 and 5; but after Year 5, growth should be a constant 9% per year. If the required return on Computech is 18%, what is the value of the stock today? Round your answer to the nearest cent. Do not round your intermediate calculations.
Answer : Calculation of Stock Price Today :
Stock Price is the Present value of Dividend and Terminal Value :
| Year | Dividend / Price | PVF @18% | Present Value of Dividend |
| 3 | 0.5 | 0.608630873 | 0.304315436 |
| 4 | 0.72 | 0.515788875 | 0.37136799 |
| 5 | 1.0368 | 0.437109216 | 0.453194835 |
| 5 (Terminal value) | 12.5568 (Working Note) | 0.437109216 | 5.488693006 |
| Stock Price Today | 6.62 |
Working Note :
Terminal Value = Dividend in Year 6 / (Required Return - Growth Rate)
= (1.0368 * 1.09) / (0.18 - 0.09)
= 12.5568
Stock Price Today is 6.62
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